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Rating Action:

Moody's changes outlook on AB Volvo's Baa2 ratings to stable from negative; affirms ratings

28 Jul 2015

London, 28 July 2015 -- Moody's Investors Service has today changed to stable from negative the outlook on the Baa2 long-term issuer rating assigned to AB Volvo (Volvo). Concurrently, Moody's has affirmed this rating as well as the Prime-2 short-term issuer rating of Volvo, the Baa2 long term senior unsecured debt ratings and P-2 short-term ratings of its rated guaranteed subsidiaries and the Ba1 long-term rating assigned to the junior subordinated hybrid securities issued by Volvo Treasury AB and guaranteed by Volvo.

"Our decision to stabilise the outlook on Volvo's ratings reflects the recovery in the European truck market as well as the company's continued efforts to strengthen its cost base and competitiveness. These factors, together with very positive foreign currency movements, have boosted Volvo's profitability and enhanced its financial ratios for the first half of 2015," says Yasmina Serghini-Douvin, a Moody's Vice President -- Senior Credit Officer and lead analyst for Volvo.

RATINGS RATIONALE

Today's change of outlook to stable from negative reflects the improvements in Volvo's operational performance during H1 2015, supported by very positive currency effects and a recovery in the European truck market.

In Europe, where the company's operating leverage is high, Volvo's deliveries and order intake in the first half of 2015 grew by 19% and 17%, respectively (compared to +1% and -17% in H1-2014). Both Volvo and Renault Trucks brands reported improving volumes and the company's expectations for the region of 250,000 heavy-duty trucks in 2015 remain unchanged.

Outside of Europe, Volvo reported disparate trends and results with North America continuing to display good market fundamentals with a better aftermarket business at Volvo, even though order intake for the Mack brand was very weak in the second quarter of 2015 (-50% year-on-year). The company attributed this slackening of orders to cancellations of large dealer orders placed in the final quarter of 2014.

While demand in Brazil remains weak and a slowing Chinese economy weighs on truck demand, these issues were more than offset by favorable currency movements, ongoing efficiency measures and a positive product mix, as Volvo focuses on more profitable equipment and machinery. As a result of these measures, Volvo's construction equipment division (CE) posted a large increase in profitability in H1 2015 despite sharp volume declines in Russia, China and Brazil.

Overall, Volvo's Moody's-adjusted EBIT margin increased to 3.2% in the 12 months to 30 June 2015 up from 2.2% in 2014 and 2.7% in 2013. The company has achieved these improvements despite incurring restructuring charges associated with its ongoing efficiency programme, which are not excluded from Moody's ratios calculations.

In addition, higher profits combined with a larger-than-expected working capital inflow contributed to a strong Moody's-adjusted free cash flow generation of SEK12.2 billion in the 12 months to 30 June 2015. Volvo's Moody's-adjusted (gross) debt/EBITDA ratio declined to 3.2x as of 30 June 2015 compared to 4.3x in 2014 and 4.2x in 2013 and its retained cash flow/net debt was 36.9% up from 26.4% in 2014.

In Moody's view, the company's financial position was helped by the issuance in the final quarter of 2014 of EUR1.5 billion (approximately SEK14.0 billion) worth of subordinated hybrid securities, which were attributed a 50% equity credit by the rating agency. In the next few quarters, Moody's anticipates that Volvo will likely deliver a further improvement in its credit metrics to levels which would position the company more comfortably within the Baa2 rating category.

RATIONALE FOR STABLE OUTLOOK

The stable outlook reflects Moody's expectations that improving trends in the European truck industry and continued efficiency measures will support a further increase in Volvo's profits. Together with the company's broadly balanced financial policies, this should help Volvo achieve and maintain better credit metrics in line with the rating agency's guidelines for a Baa2 rating (i.e., a Moody's-adjusted EBIT margin trending towards 5% as well as a Moody's-adjusted debt/EBITDA reducing towards 3.0x).

WHAT COULD CHANGE THE RATING UP/DOWN

Moody's could consider upgrading Volvo's ratings if (1) the company were able to achieve and maintain a strong operating performance through the cycle, as indicated by a Moody's-adjusted EBIT-margin above 8% on a sustainable basis; (2) it were to display at least stable market share performance in the key regions of its business segments; and (3) there were evidence that Volvo could maintain reasonable financial metrics throughout the cycle, such as (i) a Moody's-adjusted debt/EBITDA ratio trending towards 2.5x and falling below 2.0x in the peak of a cycle and (ii) a retained cash flow/net debt ratio remaining above 30% through the cycle.

Moreover, Moody's expects that Volvo would be able to improve then maintain a solid liquidity profile with cash needs being covered with cash sources for more than the next 12 months under the rating agency's scenario, whereby the company has no access to the debt capital markets.

Volvo's Baa2 ratings could come under downward pressure absent a continuous recovery in key financial metrics over the next few quarters, as evidenced by an improvement in its EBIT margin towards 5% and a Moody's-adjusted debt/EBITDA reducing towards 3.0x. In addition, failure to generate a positive free cash flow could lead to a downgrade. Weakening asset performance at Volvo Financial Services and increasing credit losses could also put pressure on the rating.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Global Manufacturing Companies published in July 2014. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

List of affected ratings

Affirmations:

..Issuer: AB Volvo

.... LT Issuer Rating, Affirmed Baa2

.... ST Issuer Rating, Affirmed P-2

..Issuer: Volvo Treasury AB

.... BACKED Senior Unsecured Regular Bond/Debenture, Affirmed Baa2

.... BACKED Senior Unsecured Medium-Term Note Program, Affirmed (P)Baa2

.... BACKED Junior Subordinated Regular Bond/Debenture, Affirmed Ba1

.... BACKED Commercial Paper, Affirmed P-2

.... BACKED Other Short Term, Affirmed (P)P-2

..Issuer: Volvo Treasury Australia Pty Ltd

.... BACKED Senior Unsecured Medium-Term Note Program, Affirmed (P)Baa2

.... BACKED Commercial Paper, Affirmed P-2

.... BACKED Other Short Term, Affirmed (P)P-2

..Issuer: Volvo Treasury North America LP

.... BACKED Commercial Paper, Affirmed P-2

Outlook Actions:

..Issuer: AB Volvo

....Outlook, Changed To Stable From Negative

..Issuer: Volvo Treasury AB

....Outlook, Changed To Stable From Negative

..Issuer: Volvo Treasury Australia Pty Ltd

....Outlook, Changed To Stable From Negative

..Issuer: Volvo Treasury North America LP

....Outlook, Changed To Stable From Negative

Headquartered in Gothenburg, Sweden, AB Volvo is a global manufacturer of trucks, buses and construction equipment, and drive systems for marine and industrial applications. Moreover, Volvo's financial services operation provides complete solutions for financing and service. In 2014, Volvo generated revenues of SEK283 billion and an operating income of SEK5.8 billion.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The following information supplements Disclosure 10 ("Information Relating to Conflicts of Interest as required by Paragraph (a)(1)(ii)(J) of SEC Rule 17g-7") in the regulatory disclosures made at the ratings tab on the issuer/entity page on www.moodys.com for each credit rating as indicated:

Moody's also was paid for services other than determining a credit rating in the most recently ended fiscal year by the person that paid Moody's to determine the following credit ratings: all ratings for all debts included in the action assigned to AB Volvo.

Moody's was not paid for services other than determining a credit rating in the most recently ended fiscal year by the person that paid Moody's to determine the following credit ratings: all ratings for all debts included in the action assigned to Volvo Treasury AB, Volvo Treasury Australia Pty Ltd and Volvo Treasury North America LP.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Yasmina Serghini-Douvin
VP - Senior Credit Officer
Corporate Finance Group
Moody's France SAS
96 Boulevard Haussmann
Paris 75008
France
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Matthias Hellstern
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's changes outlook on AB Volvo's Baa2 ratings to stable from negative; affirms ratings
No Related Data.
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